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Can I Use My TFSA as Collateral for a Quick Loan?

Sometimes life happens and a person needs a few thousand dollars in a hurry. They may even have that same few thousand saved up in a Tax Free Savings Account but it’s locked up in a GIC that can’t be cashed until it reaches maturity. The question then is: Can I use my TFSA as collateral for a quick loan?

You Can Not Use RRSP Assets as Collateral for a Loan

If you run into financial problems, your bank cannot seize your RRSP assets, at least until you try to withdraw them, to reclaim what you owe them on a loan. Consequently, no legitimate lender will let you use the value of the assets in your RRSP as collateral for a loan.

What Is Collateral?

(This is not a legal definition just an approximate explanation. If you need more details, please talk to a financial expert or lawyer.)

Collateral is something of value that the bank can claim if you default on your loan by not paying it back. For example, if you have a brand new car which is fully paid off, a bank might allow you to list the car as collateral for a small short-term loan. If you don’t pay the loan back in full with the agreed interest by the payable date, the bank can then take your car, sell it, keep the amount needed to redeem the loan and to recover the costs of forcing them to seize your car, etc, then give you the balance of the value.

Banks prefer cash and investment assets as collateral as they are much easier for them to process than physical goods like cars.

You Can Use the Assets in Your TFSA as Collateral for a Loan

Unlike RRSPs, the assets in your TFSA can be pledged as collateral against a loan.

It’s important to remember, though, that the bank does not *have* to allow you to use your TFSA as collateral. It’s up to them. There is no rule that says they must lend you money.

What Type of TFSA Assets Might Be Acceptable As Collateral?

If your TFSA is invested in cash, the bank would probably suggest you just withdraw the cash and use it instead of getting a loan. In most cases, that would be the sensible solution.

If your TFSA is invested in bonds or GICs, the bank would probably allow you to pledge part of the value of those assets as collateral against a loan. They would likely need proof of the terms, principal and interest rates for the assets. You are most likely to be able to get a loan from the same financial institution that holds your TFSA as it would be easiest for them to keep an eye on their collateral and get access to it if you don’t repay your loan.

If your TFSA is invested in individual stocks, mutual funds or ETFs, it gets trickier. The bank would have to decide how risky it thinks those investments are. For example, in mid-November 2008 TD bank shares were worth about $48 each. By mid-December they were down to about $34 each. The institution making the loan knows these types of market drops can occur anytime without warning. Depending on how risky they rate your investments they may or may not accept them as collateral and they are very unlikely to loan you even 90% of the current value of them.

Borrowing Against Your TFSA to Invest in a Non-Registered Account

In his book, How TFSAs Can Make You Rich, Gordon Pape explains that you might be able to use your TFSA as collateral to borrow money which you could then use to invest in a non-registered account.

He also says “you can deduct interest on a loan against a TFSA if the money is used to invest in a non-registered portfolio, say Gena Katz of Ernst & Young Canada and Jamie Golombek of CIBC Private Wealth Management.”

Mr. Pape also points out that many people who borrowed to invest suffered only increased losses, not gains, caused by the crash of 2008-2009. Leverage can increase earnings but it can also cause devastating losses.

For most people and in most situations, I would not recommend borrowing to invest. (Not that you should ever make any investment decision based on my website. Talk to a financial professional for financial advice, not an engineer/tech writer! I’m only trying to share what I’ve learned not tell you what to do.)

In case you don’t already know, you can not deduct interest for a loan used to invest in your TFSA.

Have I Used my TFSA as Collateral?

So far I’ve never needed a short-term loan. I’m hoping I’ll never need to personally test this information.

No, it’s not. The bank or other loaner may have been willing to take a chance on the loan given someone has a RRSP but legally they cannot get the money out of the RRSP if the loan goes into default so it is not collateral. The law is quite clear that they will have no claim on your RRSP. They probably decided in your case that you were a good credit risk and went ahead with the loan.

If a person does decide to use their RRSP as collateral, which is against the RRSP act, they also risk having the government declare all of the RRSP-value used as collateral as income that year and have to pay tax on it, as it is against the rules.

Jamie Golombek wrote:
“Similarly, if you use your RRSP as collateral for a loan, something
explicitly prohibited by the Act, the fair market value of your RRSP must also
be added to your income in the year the RRSP is collateralized.